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Flashcards in Income Tax Deck (35)
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What are the eligibility requirments for a

Subchapter S Corporation?

  • Number of shareholders is limited to 100
  • The Corporation can only have a single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
  • Must be a Domestic Corporation Only individuals, estates and certain Trusts may be shareholders.

NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders. 


Tax Basis for Partnership / LLC

  • Cash invested
  • Direct loans made to the partnership
  • Partnership Debt: Loans made to the partnership - not the partner (bank loans)

NOTE: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.


Property Classes

1245 Property

  • 5 year: Computers, Autos, Trucks
  • 7 year: Office Equipment except computers,

1250 Property

  • 27.5 year: Residential rental property
  • 39 year: Non-residential real property

Remember: CATCORN


Boot / Gain Recognized / Basis

No Boot Received: Recognized Gain is zero

When Boot is Received, just answer the recognized gain is the boot received

  • Boot paid is added to Basis
  • Basis carries over from the prior property


Netting Capital Gains and Losses

Step 1:

  • ST Capital Gains and ST Losses are Netted
  • LT Capital Gains and LT Losses are Netted

Step 2:

  • If a Gain and Loss remain, they are again Netted

Step 3:

  • If a Loss remains after Netting Capital Gains and Losses, only $3,000 of the Net Losses can be used to offset ordinary income


Sale of a Personal Residence (Section 121)

$250K (single) and $500k (MFJ) of Gain from the sale is tax-free if lived in for 2 out of the last 5 years.

  • Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc.  Receives a pro-rated amount.


Recapture (1245 Property)

When the sole proprietor purchases equipment and takes Depreciation (Cost Recovery Deduction - CRD), the CRDs offset the sole proprietor's ordinary income.

When the sole proprietor sells the equipment for a gain, the sole proprietor must:

  • 1st: Look back and recapture the lesser of the CRDs taken or the Gain realized as 1245 Gain (ordinary income)
  • 2nd: Recover any excess gain as 1231 (capital gain)


Section 179

Qualifying vs. Non-Qualifying Property


  • Tangible Personal Property
  • 1245 Property


  • Real Estate
  • 1250 Property
  • Intangible (owning a franchise)


AMT Preference Items

  • Excess Intangible Drilling Costs (IDC)
  • Private Activity Municipal Bond
  • Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC)
  • Depreciation (ACRS/MACRS) but not straight line

Remember: I.P.O.D. 


AMT Add-Back Items

AMT Not-Deductible Items

Add Back:

  • Incentive Stock Option Bargain Element
  • Property and Income Taxes
  • Miscellaneous Deductions - Specifically watch out for financial advisor fees
  • Home Equity interest NOT used for home improvement


  • Standard Deduction


Postponing AMT

  • Accelerating receipt of taxable income or deferring the payment of property taxes, state income taxes, deductible medical expenses or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income)
  • Deferring exercise of incentive stock options (preference item) to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
    • Purchase public purpose muni bonds instead of private activity bonds. 


Historic Rehabilitation Programs

Historic Rehabilitation programs that are held as passive activity may generate a Deduction:

  • Equivalent Tax Credit of up to $25,000.

The benefit of this Deduction:

  • Equivalent Tax Credit phases out between $200- 250k of AGI. 

How does the Deduction Equivalent tax credit work?

  • Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250. 


Low Income Housing Credit

Low-Income Housing programs that are held as passive activity may generate a Deduction:

  • Equivalent Tax Credit up to $25,000. There is NO phase out.
  • The Low Income Housing Credit is allowed annually over a 10 year "credit period."
  • The Depreciation is straight-line over 27.5 years.

How does the credit work?

  • For example, multiply 35% by $25,000 to get a credit of $8750. 

NOTE: Because there is no phaseout, it produces a higher credit. 


Types of Phantom Income


  • Lapse of Policy Loan
  • Section 162 Life/Disability


  • Zero/Strip Income
  • TIPS
  • Declared but not paid Dividends


  • K-1 Income from LP/FLP
  • Recapture Retirement
  • NUA
  • 20% withholding plan distributions, Secular Trust


Charitable Giving

Calculate the Maximum Deductible - 60% of AGI

  • Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
  • Calculate the eligible amounts given to 30% organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders. 


Charitable Giving (Types of Property - 60% Charities)

  • Long-Term Appreciated Property, using FMV deduct up to 30% of AGI
  • Use-unrelated Property, ST Capital Gain Property using basis deduct up to 50% of AGI


Sources of Federal Tax Law/Authority

  • Internal Revenue Code: Primary Source of all tax law. 
  • Treasury Regulations: Great authority, but not law.
  • Revenue Rulings and Revenue Procedures: Administrative interpretation. May be cited. 
  • Congressional Committee Reports: Indicate the intent of Congress. May not be cited.
  • Private Letter Rulings: Apply to a specific taxpayer .
  • Judicial Sources: Court decisions interpret


Step Transaction

Ignore the individual transaction and instead tax the ultimate transaction

  • Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.


Sham Transaction

A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.

  • Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons. 


Substance Over Form

The substance of a transaction, and not merely its form, governs its tax consequences. 

  • Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary. 


Assignment of Income

Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.

  • Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.


Dates for Paying Estimated Taxes

  • April 15
  • June 15
  • September 15
  • January 15


IRS Penalties

  • Frivolous Return: $5000
  • Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence. 
  • Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
  • Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%. 
  • Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)


Federal Withholding Tax Underpayment Penalty

To avoid, pay the lesser of:

  • 90% of the current year's tax liability
  • 100% of the prior year's tax liability (or 110% if the last year's adjusted gross income exceeded $150,000)


Adjustments for Adjusted Gross Income (AGI)

The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income.

The main Adjustments or Deductions to Income are:

  • IRA Contributions
  • Self-employment Tax
  • Self-employment Health Insurance (100%)
  • Keogh or SEP Alimony paid


Schedule A Itemized Deductions

  • Medical, Dental, and LTC (10% of AGI)
  • Casualty and Theft Losses
  • Real Estate Taxes**
  • Investment Interest Expense
  • Home Mortgage Interest
  • State and Local Taxes**
  • Personal Property Tax**
  • Charitable Gifts

**Limited to $10,000/yr.


Casualty Losses (Calculation of the Deductible Loss)

First: Use the lesser of basis or FMV

Second: Subtract any insurance coverage

Third: Subtract $100 (floor)

Fourth: Subtract 10% of AGI. Must be a presidentially declared "natural disaster"


Kiddie Tax

All net UNEARNED income of a child who has:

  • NOT attained the age 18
  • Is 19-23 and a full-time student
  • Has at least one parent alive taxed at Trust Rates regardless of the source of the assets.

Children under 18 are entitled (2019) to a Standard Deduction amount ($1,100) and an additional $1,100 of unearned income will be taxed at the child's rate (10%).


Self-Employment Income

  • Net Schedule C Income
  • General Partnership Income (K-1 income)
  • Board of Directors fees
  • Part-time earnings (1099) NOT wages or K-1 distributions from an S Corp


Self-Employment Tax Calculation

The Taxable Wage Base will not exceed $132,900 (2019).

  • If you added up the self-employed income, and you exceeded $132,900, you did something wrong. Why? Social Security tax stops at $132,900 (2019).

Shortcut: Multiply Self-employment Income by 0.1413


Tax Credits

  • Credit for child and dependent care expenses
  • Child Tax Credit (up to $1,400 could be refundable)
  • Adoption Credit
  • Elderly and Disabled Credit
  • Foreign Tax Credit
  • Earned Income Credit (refundable)


Accounting Methods

  • Cash: Mandatory where taxpayer's records reflect only cash transactions, and there are no inventories. 
  • Accrual: Mandatory for purchases and sales where there are inventories. 
  • Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business. 
  • Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started. 


Personal Service businesses that should stay away from

doing a regular Corporation

  • Health
  • Accounting / Architectural
  • Law
  • Engineering

Remember: H.A.L.E.


Realized Gain vs Recognized Gain

What's the difference?

  • Realized is Economic or Inherent Gain at the time of the transaction.
  • Recognized is the past of Realized that is immediately taxable.


An individual is required to file a tax return if earnings from self employment (1099) are more than ______?